What is a funding rate, and why does it exist?

The funding rate is the mechanism that replaces expiry. It is the single most important number in crypto derivatives, it is publicly visible on every venue, and it is arithmetic rather than opinion.

The mechanism

At fixed intervals — commonly every 8 hours, hourly on some venues — every open perpetual position either pays or receives a payment:

• Funding positive → longs pay shorts.
• Funding negative → shorts pay longs.

The payment goes between traders, not to the exchange. And note the tethering logic: if the perp trades above the spot index, funding turns positive, so holding a long gets steadily more expensive and holding a short gets paid to exist. Both forces push the contract back toward the index. Reverse the sign and the same machinery pulls it up. No expiry required.

How the rate is built

Formulas vary by venue and are published, but the shape is consistent:

Funding rate = premium component + interest component, clamped to a cap.

The premium component is a time-average of the perp's mark price against the spot index over the interval — the drift the mechanism is correcting. The interest component is a small fixed term reflecting the cost difference between the two margin currencies; on several major venues its default is 0.01% per 8-hour interval. Caps are typically a fraction of a per cent per interval, and both the formula and the cap are venue-specific.

The payment arithmetic

Two details govern everything:

1. Funding is charged on the position's notional value, not on the margin you posted.
2. On most venues you pay or receive only if you hold the position at the funding timestamp — a snapshot, not an accrual.

Worked, at the common baseline. A long position with $100,000 of notional, funding at +0.01% per 8 hours:

• Per interval: 100,000 × 0.0001 = $10
• Three intervals a day: $30 per day
• Annualised on notional: 0.01% × 3 × 365 = 10.95% a year

Now the part people miss. Suppose that $100,000 of notional is held against $20,000 of margin — five times leverage. The $30 a day is unchanged, but measured against the capital actually posted it is 0.15% per day, or 54.75% a year.

The same funding rate is 10.95% on notional and 54.75% on capital. Neither number is wrong; they answer different questions. Quoting the small one while living with the large one is a recurring error.

Two more cases, for range

Elevated funding. In strong trends, funding on major perps has repeatedly run at +0.10% per 8 hours or more for sustained stretches. On the same $100,000: 0.30% a day = $300 a day, and 109.5% a year on notional. At five times leverage that is over 500% a year measured against posted capital. A position can be perfectly correct about direction and still be consumed by carry.

Negative funding. At −0.05% per 8 hours, the long receives $50 per interval — $150 a day — because the perp is trading below the spot index and shorts are paying to keep it there.

What it is, and what it is not

A funding rate is an observation about the price of a derivative relative to its index, converted into a cash flow. It is a cost or a receipt. It is not a forecast, not a signal, and not an instruction. What it does and does not permit you to infer about positioning is the subject of the next lesson — and the honest answer is narrower than the internet suggests.

Nothing here is advice, and none of it is a suggestion to hold a leveraged position in any direction.

Try it now

1. Venues publish their funding history free. The table below summarises one: Binance's BTCUSDT perpetual, which funds every 8 hours, over the 90 days to 28 September 2026 (271 readings, measured that day from the venue's public history). Annualise each row (rate × 3 × 365), and compare the highest reading with the default interest component described above.

2. The spot price over the same period is below. Measure the last three months of it, then mark where the table's extremes fell relative to that move.

3. Note where funding was most extreme, and resist, for now, the urge to draw any conclusion from it. That is the next lesson, and the temptation you are resisting is exactly what it is about.